Suppose a U.S. resident buys a Jaguar automobile from Great Britain and the British exporter uses the receipts to buy stock in General Electric. Which of the following statements is true from the perspective of the United States?

Question

a. Net exports fall, and net capital outflow falls.
b. Net exports rise, and net capital outflow rises.
c. Net exports fall, and net capital outflow rises.
d. Net exports rise, and net capital outflow falls.
e. None of the above is true.

Answer 1

To analyze the situation, we need to consider the terms "net exports" and "net capital outflow.”

1. Net Exports (NX): This is the value of a country's total exports minus its total imports. When a U.S. resident buys a Jaguar from Great Britain, it counts as an import for the U.S. Therefore, net exports will fall because the import increases while exports remain unchanged.

2. Net Capital Outflow (NCO): This represents the net flow of capital out of a country. When the British exporter uses the receipts from the sale of the Jaguar (which is a payment made by the U.S. resident) to buy stock in General Electric, capital is flowing from Great Britain to the United States. In this case, the capital is effectively flowing into the U.S. This means that the net capital outflow from the U.S. will fall because there is an inflow of capital when the British buyer purchases U.S. stocks.

Putting this all together, we find that:

• Net Exports fall.
• Net Capital Outflow falls.

The correct answer is: a. Net exports fall, and net capital outflow falls.